The popular narrative is that China’s rise from nowhere in 1978 to its position today as the world’s second largest economy has been fueled by cheap labor. While this is one factor, cheap capital and land have been as important. Most Chinese, who are huge savers, have little choice but to put their money in bank accounts that pay interest lower than the rate of inflation; these funds are then channeled into state-owned enterprises whose capital expenditures create the factories and buildings on which the Chinese miracle has been built.
(See pictures of China’s cutting-edge architecture.)

But the Chinese are pretty smart about money. They see the fortunes the elites have made by buying land at bargain prices and developing it. Ordinary individuals cannot get in on the ground floor to reap the obscene profits made by well-connected officials who facilitate purchases from historical occupants, but they are permitted to invest in real estate at later stages of development, and their wealth grows every year. Anyone who’s spent more than a day or two in China knows that real estate is a popular preoccupation. Apartment flipping is all the rage; real estate prices have tripled in the past five years.

The question is whether the building bubble — not only in housing but in commercial property as well — is about to burst. Everywhere you go in China, you see new airports and high-speed train lines under construction; see-through apartment buildings whose empty units loom unilluminated in the night; beautiful underutilized roads, bridges and tunnels; and newly risen ghost towns waiting for occupants. One such town, Kangbashi, in Inner Mongolia, has everything a city needs, including investors who have bought apartments on spec. Yet it remains unoccupied, as reported last year in this magazine.

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Unfortunately, the strains caused by hell-bent growth are starting to show up everywhere. Mass protests of party abuses — often the taking of land without just compensation — have been rising so steadily that the government did not publish the number of them last year. At government facilities in many regions of the country, there have been explosions set off by citizens so disaffected that they don’t care about the consequences.

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Senior Chinese officials are secretly quite worried about a hard landing. Many observers say a sharp economic decline won’t be permitted to happen before the change of leadership in 2012. But the Chinese stock market was not supposed to be allowed to crash in the run-up to the 2008 Beijing Olympics, and it did. The Chinese Communist Party is trying to engineer a delicate redefinition of how its economic model will work going forward.